Speech by Mr Christos Papoutsis, Member of the European Commission, responsible for Energy, Enterprise Policy and Tourism, "The Priorities of European Energy Policy and the Liberalisation of the Internal Energy Market"

The European InsituteWashington, 12 March 1998

Ladies and Gentlemen,

I would like first of all to thank Ms Grapin and the European Institute for organising this breakfast meeting. Energy is a sector, which has a major impact on virtually all aspects of modern life. At the same time, it is a sector, which is currently undergoing tremendous change, and which is facing many new challenges in Europe and elsewhere.

Today, I would like to share with you some of my thoughts on the main priorities for the European energy policy, and focus particularly on the liberalisation of the energy market, which is currently taking place.

In the energy area, market conditions are rapidly changing in the European Union. Greater competition is being introduced alongside the general trend of globalisation.

Environmental protection is becoming an ever increasing factor, and the demands and expectations of consumers and customers are changing. The energy supply industry will need to adapt to these changes and, indeed, this is happening in all Member States of the European Union.

Structural re-alignments are taking place, strategic alliances are being formed and new players are, and will continue to be, entering the market. The key challenge, both for policy makers and for industry,will be to ensure that these structural changes take place in an orderly fashion. That they lead to the achievement of the overall European energy policy objectives of security of supply, improved competitiveness and environmental protection.

The European Commission is playing its full role in this, and is taking an overall approach to energy policy. Just recently the Commission has introduced a proposal for a new framework for its programmes and policies in the energy field.

This proposal covers important issues such as energy efficiency, renewable sources of energy, market observation, nuclear safety and clean coal use. Policies and programmes to support such activities are nothing new, but, with a new integrated approach, the needs of industry and energy consumers can be much better addressed and served.

The European Commission also closely monitors international and European energy developments. On this basis, it produces, at regular intervals, short and long-term energy forecasts.

According to the latest forecast, total energy use in the European Union could grow by slightly less than 1% per year during the first decade of the 21st century. Growth is particularly expected in natural gas consumption, whereas the use of solid fuels is likely to decrease.

Oil consumption will largely depend on mobility and transport needs, but is expected to grow at a rate similar to the rate of growth of overall energy consumption. However, these forecasts were made before the Kyoto climate change agreement. New policy measures, aimed at realising the new emission reduction targets, should introduce a more downwards trend in energy consumption, and an increase in the use of renewable energy sources.

In spite of this, the developments on the demand side, combined with the resource situation within the European Union, is likely to lead to a significantly larger dependence on external energy supplies. Total energy dependence of the European Union would, in fact, increase from the current 50% to as much as 70% by 2020.

Politically and strategically this is a development which must be closely monitored. The European Union must strengthen its international energy co-operation, further develop its indigenous resources, in particular renewable sources of energy, and improve its performance as regards energy saving and energy efficiency.

I would like to turn now to the important issue of improving the competitiveness of European industry. And, to say a few words about the implications of the European Community directives on natural gas and electricity.

We consider that the entering into force of the directive on the internal electricity market, and the recent political agreement in the Council on the internal market for natural gas, are important milestones in the development of the European electricity and gas markets. It is also one of the last pieces of legislation to be put in place to complete the internal market, as such, in the European Union.The electricity and gas markets have been characterised by a high degree of centralised management, and by vertically integrated, and often public-owned undertakings, enjoying a dominant or monopolistic position. The lack of competition has led to considerably higher electricity and natural gas prices in Europe, than in many other industialised countries, including the United States.

The fact that European Union Directives are coming into force, means that all Member States will now have to introduce a minimum level of competition. In the Commission's view this will significantly add to the impetus for competition created by the market forces themselves.

As you know, virtually all activities of the energy sector have a considerable impact on the environment. Environmental protection is one of the three basic objectives of our energy policy.

Highest on the environmental agenda at present is the aim to limit greenhouse gas emissions. The Eurropean Union played a leading role in the international negotiations in Kyoto last year in December, which led to new international targets in this area.

The Commission is content that an agreement was reached, even though we had aimed for stricter reduction targets. One of the major achievements of the Kyoto agreement is that other leading greenhouse gas emitters also agreed to make substantial progress in this area. We look forward to the US ratification of the Kyoto agreement, and to our co-operation for its implementation.

A strengthened environmental agenda places new responsibilities on the energy industry. One of the most important priorities for the Commission in the very near future is to develop our own overall Action Plan, in order to implement the Kyoto protocol in the European Union.Clearly, energy is a key sector for greenhouse gas emissions, and it will be one of the key areas to look at for emission reductions. But our post-Kyoto strategy will also cover other sectors than energy, such as transport, industry and agriculture.

From the energy angle, more emphasis will have to be placed on energy efficiency and on the use of renewable sources of energy. Both of these issues are at the heart of European Union energy policy. And, in both areas there is scope and potential for significant improvement both in Europe and elsewhere.

In the European Union, we consider renewable sources of energy as one of the main energy sources of the future. In the Commission we are in the process of establishing a comprehensive European strategy and an action plan for promoting renewable energy sources. Our aim is to double their contribution to the European Union energy balance by 2010, compared to the present level, from 6 to 12%. With respect to the liberalisation of the energy markets, I would like to underline that I do not consider this as a goal in itself, but rather a very important tool. A tool which contributes to the development of the economy, towards its goals of efficiency and competitiveness.

Indeed, the creation of a single market has contributed to growth, competitiveness and employment. It has been responsible for an increase in the European Union income of between 1.1% and 1.5%, and for the creation of a substantial number of jobs. And this, at a time when unemployment is one of our major preoccupations. But its full potential has not yet been realised. Barriers still remain. A better single market is necessary for more growth, more innovation and more jobs.

As I said earlier, comparisons of our electricity and gas prices with the main competitors show the present disadvantage. For example, electricity bought in the European Union is approximately one third more expensive than here in the United States.Today, most companies are exposed to international competition. The rapid changes in information and process technology imply for many industries that they have to compete in an ever-expanding global market place. Unrealistically high energy prices are therefore damaging the competitiveness of industry. Liberalised energy markets will strengthen the competitiveness of the energy consuming industries, as they will force the energy producing industries to be as efficient and competitive as possible.

A further consequence of the opening up of energy markets is that security of supply will also increase. Supply shortages and price changes on specific fuels will also be less dramatic, due to the increased inter connections between, and the diversity of the systems.

We have set out in European legislation the basic principles for an internal market, which the Member States will have to include and follow in their national systems. But, we have not imposed one uniform system throughout the European Union. The legislation provides for subsidiarity and flexibility for Member States to apply these rules to their particular national situations. And, this is reflected in the choice of competitive models.

The objective of environmental protection is also present in our market liberalisation. The legislation allows Member States the possibility of requiring the operator of the transmission system to give priority to electricity from renewable energy sources and from combined heat and power generation. There is a clear policy priority to promote renewable energy sources and the use of combined heat and power, provided this is done in a manner which does not frustrate the market-opening objectives.

In terms of the minimum legal requirement for market opening, by 19 February 1999, at least 25% of the market will have to be liberalised according to the European legislation. And, this requirement progressively increases to at least 33% in 2003. Since this degree of market opening is a minimum level, and Member States are free to go further, we know already today that these minimum provisions will be surpassed significantly.

According to the information provided by Member State governments, the real market opening for electricity at the end of this century will be more than 50%. The global turnover per year involved is more than $160 billion for the European Union electricity market.

Let me now turn to the liberalisation of the natural gas sector. We are currently in the final phase of the negotiations on the gas Directive and I am confident that the text will be adopted in the next months. The objective of the draft Directive is to open up the gas market to competition over a ten-year period, following which, as a minimum, 40% of the European gas market will be liberalised.

During the first step, the aim is to give the industry most subject to international competition the possibility to freely choose its supplier, and thus profit from more competitive gas prices. Gas-fired power generators, another important class of gas customers, will also gain from the liberalisation of the market. In this way, final domestic consumers of electricity will benefit immediately from the liberalisation.

Even if the draft Directive follows closely the general structure of the electricity Directive, the gas sector presents some peculiarities and technical characteristics which needed careful consideration. Thus, for example, sufficient protection for take-or-pay contracts is built into the new framework. This framework will help ensure security of supply, and protect against possible serious economic problems of gas companies, when opening up the market.

I should also underline that the electricity and gas liberalisation legislation, while constituting a very major step forward, will be constantly re-evaluated by the Commission. Eventually, future proposals may be made, with a view to opening up further these markets, and extending the benefits of competition to a larger part of consumers.

Let me conclude my talk today with a brief word on European Union-US co-operation in the field of energy. Of course you will know that at a general level there are very extensive contacts between the European Commission and the US Administration on all areas of policy. Consultations and cooperation on energy issues are an important component of this co-operation.

One particular area of cooperation, in this context, is on science and technology, including on energy, where a cooperation agreement was signed here in Washington on 5 December.

Environmental issues related to energy, and in particular the follow-up to the Kyoto agreement, are also clearly a very important area of consultation and co-operation.

Market liberalisation too, in the gas and electricity sectors is also an area where we have had many contacts and useful exchanges of experience.

In more specific areas, the Euratom-US Agreement on nuclear trade requires regular contacts. And, we also discuss other nuclear issues, such as decommissioning and safety issues. These latter are particularly important in some of the former planned economies of Central and Eastern Europe and the former Soviet Union. And indeed, our assistance activities form another area of consultation and cooperation.

In a global context the European Union and the US have very similar views in their basic philosophy, even if there are sometimes significant differences of approach. This philosophy rests on market based systems, with intervention sometimes necessary to achieve security or environmental objectives.

This common message will be used in the forthcoming G8 Energy Ministerial to be held in Moscow on 1st April, which I am looking forward to attending. This market based message is one which we both share. It includes the competitive and open framework which is necessary to attract the huge investments that will be required, particularly in the transition and developing economies

Ladies and Gentlemen,

All this serves to remind us how extensive and important energy related issues are, as well as the need to keep them all in mind in striving for our broader policy objectives. Liberalisation is a very important area of our current work, but should nevertheless be seen in the broader context of sustainable economic development and job creation.